Valmont Profits From a Looming Repeat of Last Year's Drought

Valmont Industries (NYSE: VMI  ) reported impressive first-quarter earnings recently, with operating income rising 43% on strong sales and increasing margins. The growth in sales was largely due to the company's Utility Support Structures and Irrigation segments, which each had 25% sales growth.

Utility Support Structures was helped by an expansion of the electric grid in the United States. Valmont is one of the biggest manufacturers of utility poles in the U.S., and because of increasing power usage, utility companies are investing heavily in building infrastructure to handle it. Southern (NYSE: SO  ) increased its capital expenditures by 20% from 2008 to 2012, and Duke Energy (NYSE: DUK  ) beat that in just the last year.

Irrigation was helped along by the continuing drought in the United States. Last summer was one of the worst droughts on record, and according to the United States Drought Monitor, almost the entire western half of the U.S. is still experiencing some kind of drought, with much of the Corn Belt and Great Plains regions experiencing "extreme" or "exceptional" drought conditions.

In 2008, only about 14% of cropland in the U.S. was irrigated, and less than half of that was done with high-efficiency center pivot systems, like the kind Valmont and its competitor Lindsay (NYSE: LNN  ) sell, so farmers have been scrambling to upgrade their equipment to deal with increasingly bad weather. This presents a big opportunity for Valmont, which gets about 28% of sales from irrigation equipment. The opportunity is even bigger for Lindsay, which gets about two-thirds of its sales from irrigation equipment.

Valmont mentioned in the earnings release that it has a decent backlog in the Irrigation segment, so the second quarter should be quite strong as well. As for the rest of the year, that will depend on how crop prices turn out, but given current weather conditions, it seems likely that high prices will persist, padding farmers' income. On the whole, Valmont seems optimistic, hinting that it may raise its previously stated guidance for full-year total revenues.

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